Retail Memo: The Small-Format Grocery Store Revolution Marches On: Hy-Vee, Inc. Testing A Small-Format Grocery Store in Lincoln, Nebraska

As our regular readers know, we've been writing extensively about and offering analysis on what we term the small-format grocery store revolution among major food and grocery retailers in the U.S. We also refer to it as 'The invasion of the Small-Marts.' [If you type in small format grocery stores, small-format food retailing, small-format revolution and Small-Marts(one at a time of course) in the search box at the top of the blog, or search through our archives.

The major grocery retail players in this growing small-format grocery retailing revolution in the U.S. are: Aldi USA, the U.S. division of German grocery chain Aldi, which currently operates almost 900 10,000 square foot -to- 15,000 square foot discount grocery stores in the Midwestern and Eastern U.S. (27 states); Save-A-Lot, the small-footprint, limited assortment discount grocery store division of SuperValu, Inc.; and specialty grocer Trader Joe's, which is owned by Aldi.

Additional major small-format retail players include: Wawa, which operates hundreds of hybrid small-format grocery-convenience stores in the Eastern U.S.; Giant Eagle Supermarkets, which operates a handful of Giant Eagle Express small-format grocery stores and is building more, and Tesco's Fresh & Easy Neighborhood Market, which has opened 59 small-footprint grocery markets in the last four months in Southern California, Arizona and Nevada and plans to build at least 150 more stores in the next two years.

Other key players in the small-format grocery store revolution include: Whole Foods Market, Inc., which is getting ready to open its first Whole Foods Express store in Boulder, Colorado; Wal Mart, Inc., which will open at least four of its new, small-footprint grocery stores called Marketside this summer in the Phoenix, Arizona Metropolitan region; Safeway Stores, Inc., which plans to open five new, small-format grocery markets in the San Jose region of the San Francisco Bay Area this summer, and a couple others.

To this fast-growing list, we can now add West Des Moines, Iowa-based Hy-Vee, Inc. to the list of major grocery retailers entering the small-format food retailing world in the U.S.

Employee-owned Hy-Vee, which operates 223 supermarkets in seven Midwest states and had 2007 gross sales of $5.6 billion, is planning to test a small-format grocery store in the city of Lincoln, Nebraska, which is among other things home to the University of Nebraska. The small-footprint grocery market will go into a neighborhood where the retailer already has an existing supermarket but is closing this week.

Hy-Vee's small-format grocery store will average about 20,000 -to- 25,000 square feet. The store will offer a more limited selection of grocery and fresh food items than the chain's larger supermarkets do but will still merchandise all of the basic categories contained in its larger stores: dry grocery, fresh produce, fresh meat, dairy, perishables and the like, according to Richard Jurgens, Hy-Vee's CEO. In other words, the store will contain all the regular categories --including some specialty and natural foods, but just have a more limited assortment, which is the case with all of the major players--to one degree or another--in the small-format grocery retailing game.

The grocery chain, who's motto is "Where there's a helpful smile in every aisle," says its been studying different format options for some time, looking for concepts that would allow it to serve different neighborhoods which have different needs. The neighborhood where the first small-format grocery market will be located is called University place. It's near the University of Nebraska and contains a mix of students, faculty and University employees, along with residents who live in the neighborhood but work elsewhere in the city.

Hy-Vee, founded in 1930, is still finishing the design of the small-format grocery store, according to Jurgens. He says the retailer will provide further information soon. After the design in finalized and signed off on in the next month to six weeks, the grocery chain plans to submit the plans to the city of Lincoln, and once they are approved it will set the construction and grand opening schedule, Jurgens says.

CEO Jurgens says the retailer sees value in creating smaller-format grocery stores with limited assortments as part of its food retailing format arsenal. "It was important for us to come up with a format that would be intriguing, practical and successful. We think we've found one," he says.

The existing supermarket in the University Place neighborhood in Lincoln is set to close this Sunday. However, a new, much larger Hy-Vee supermarket will open just 2 miles away in about two weeks, Jurgens tells us. However, the grocer is still anxious to get the new, small-format market completed and approved so the grocer can serve the neighborhood more directly by having in store right in the heart of it.

Expect the Lincoln, Nebraska University neighborhood small-footprint market to offer a decent selection of specialty, natural and organic groceries (in addition to the limited assortment of supermarket basics), along with fresh, prepared foods, to fit the neighborhood's demographics, which includes a high percentage of college educated residents.

We haven't been able to find out the name--if it exists yet--of Hy-Vee's new small-format grocery market concept. However, we plan on keeping our ears out for it.

At 20,000 -to- 25,000 square feet, the Hy-Vee small-format concept is a bit larger than most of the others mentioned in the beginning of this piece. Aldi, Save-A-Lot, Trader Joe's. Wawa, Giant Eagle and Tesco's Fresh & Easy small-format stores all average about 10,000 -to- 15,000 square feet. However, Wal-Mart's Marketside, Safeway new small-footprint markets, and Whole Foods Express are all respectively about 15,000 -to-25,000 square feet, as we've reported before.

Ironically--or perhaps by design-- 20,000 -to- 25,000 square feet is about the average size of the neighborhood independent grocery store in America today. (Many range from 25,000 -to-about 35,000 square feet as well.) And, there are thousands of thriving small-format multi-store and single-store independents across the USA operating these smaller neighborhood grocery stores in the communities in which they live and work. It's these independents, really, who are the catalysts of the small-format grocery retailing revolution among major retail players currently happening in the U.S.

Monday Morning Java: Safeway Small Format Stores On the Way

The small food store format invasion is coming: Safeway, perhaps Wal-Mart, to counter Tesco's Fresh & Easy Neighborhood Markets' San Francisco Bay Area entry

As our readers know, we've been reporting on and writing extensively about Tesco's Fresh & Easy Neighborhood Market format. In particular, we've been among the first publications to break news about the retailer's Northern California plans. (Read our December 5 story about Fresh & Easy store developments in Northern California and the Bay Area here.)

We also were one of the first publications to report that Wal-Mart has had a high-level team in the San Francisco Bay Area working on the development of two small format retail stores--one a small footprint, convenience-oriented grocery store similar in concept to Tesco's Fresh & Easy markets, and the other a stand-alone health and wellness-style format which would feature an in-store health and wellness clinic and sell a wide range of health-oriented goods, including natural products. (Wal-Mart has trademarked two retail store names, "City Thyme" and "Field & Vine," as we reported here.)

We named the Wal-Mart small format project--along with the Fresh & Easy format and other new age convenience-style stores from the likes of Giant Eagle (Giant Eagle Express) and Whole Foods Market (Whole Foods Market Express; a prototype store being developed in Boulder, Colorado)--"Small Marts," a play on words combining the Wal-Mart name and the shortened name often used for a retail market or store.

In our September 6, 2007 piece, The invasion of the "Small Marts": Will there be a small format revolution by U.S. retailers, we provided an analysis of what Tesco's Fresh & Easy format could mean in terms of other food retailers following a similar path in the U.S. In addition to discussing Giant Eagle's, (Express) Whole Foods' (Express) and Wal-Mart's developments, we also talked about Pleasanton, California-based Safeway Stores, Inc. It's CEO, Steve Burd, said the grocer is watching Tesco closely, and researching the Fresh & Easy format, it's potential locations, and possible competitive pressures on the retailer's Western U.S. operations, especially in California. (Read more here.)

In the "Invasion of the Small Marts'" piece mentioned above, and in all of our writing on the issue, we've discussed how one market in particular, Northern California and particularly the San Francisco Bay Area, will be the most competitive and difficult for Tesco with its Fresh & Easy stores thus far--compared to Southern California, Nevada and Arizona--where the British grocer now has about 20 stores open.

Among the reasons for this increased competition, we've sighted Safeway Stores--the fact that it's the food retailing market share leader in the region, that the Bay Area is home to it's corporate headquarters, and of course the small format research project articulated by CEO Burd in response to the entering of Fresh & Easy stores in the region.

Additionally, we've discussed the major expansion efforts in Northern California (focused in the Bay Area) by Whole Foods Market, Inc., which plans to build 20-25 large supernatural supermarkets in the region (in addition to the 20-plus it already has) in the next five years, according to former Whole Foods' Northern California president Anthony Gilmore, who left his position with the grocer in October to join Safeway Stores as a director of new store development.

Safeway moving from research to action in small format store development

According to a story today in The Silicon Valley/San Jose Business Journal, CEO Burd and Safeway are moving from the research phase of their smaller format food store project to an action phase. That's right, according to the publication's sources (and confirmed by a number of our own), Safeway Stores is seeking as many as five locations in the San Jose area for stores of about 20,000 square feet, which would feature extensive selections of fresh, prepared foods, Tesco's "stock-in-trade" in it's Fresh & Easy format. At 20,000 square feet, these smaller-format stores would be less than half the size of Safeway's new Lifestyle stores, which average 45,000 to 65,000 square feet, but about double the size of Tesco's Fresh & Easy markets.

According to the Business Journal story, Safeway has retained Cornish & Carey Commercial Real Estate Brokerage to find locations for the five stores in and around the San Jose area. This is the same Bay Area region where we reported Tesco has inked a deal for it's first store in the Bay Area, on Bird Avenue in San Jose, and likely will locate as many as ten to twelve stores in the city and it's immediate environs.

Word is Safeway has Cornish & Carey trying to lock up a number of former Albertsons' supermarket buildings in the San Jose area for its new small format food stores. This is interesting since Tesco's Bird Avenue location is a former Albertsons' store, which the grocer closed a couple years ago along with a number of others in Northern California. Tesco has been targeting these empty Albertsons' stores throughout the Bay Area as locations for its Fresh & Easy Neighborhood Markets.

Safeway is a major commercial real estate player in the Bay Area, with almost 300 stores. In other words, it's a priority customer for shopping center and other commercial real estate managers. As such, it looks like the grocer is playing some store location hardball with Tesco in terms of that retailer's sight search. In the Business Journal piece, local commercial real estate sources give Safeway the thumbs up in terms of being the preferred tenant for any of the vacant Albertsons' stores. As we've reported however, Tesco already has a number of store locations locked-up in the Bay Area, with numerous other sights in negotiation.

As mentioned above, some months ago before Tesco opened a single Fresh & Easy store, CEO Burd said Safeway was preparing itself for the British grocer's small format stores, which combine basic private label and nationally branded grocery items with prepared foods offerings. Burd said, among other things, he believes Safeway has an advantage in that the grocer is a well-known brand in California (especially in the Bay Area), especially in the prepared foods niche. In fact, Safeway has been perfecting it's fresh, prepared foods over the last five years in it's Lifestyle format stores, including branding the items with an upscale flavor, using such names as Safeway Signature and Safeway Select.

Along with the extensive prepared foods initiatives in-store in its Lifestyle format supermarkets, Safeway purchased a restaurant in San Jose last summer, where it's been testing various prepared foods entrees it wants to sell in its stores. Ownership of the restaurant, called Citrine New World Bistro, was announced last month by CEO Burd. It's an innovation incubator, and consumer test kitchen for a variety of prepared foods that observers expect will be offered in the new, smaller format food stores.

Anthony Gilmore, the former president of Whole Foods' Northern California division also joined Safeway in October as a director for new store and format development. While in charge of Whole Foods' Northern California operations, Gilmore lead the development of a number of innovative formats, resulting in new stores opening this year. Among them are the European Food Hall format store in Oakland, which opened in October, and the Northern California flagship store in the Silicon Valley city of Campbell, which features a food and wine bistro in-store, along with the supernatural grocers first mini day spa, among other innovative features.

Gilmore was hired in large part to bring that experience in retail food store format innovation to Safeway, where he began his retail grocery career as a courtesy clerk. He's involved in the new small format store development, including the prepared foods offerings, as well as in another new development for Safeway--the design of a "next generation" Lifestyle format, which is part Safeway Lifestyle stores, part Whole Foods Market. As we reported three months ago, Safeway is planning to build this new, Whole Foods-like store in Pleasanton, where it's corporate headquarters is located. (More on this development soon.)

Turf war battle, small format competition could get even hotter in Bay Area

As we mentioned at the beginning of this piece, and first wrote about in August and again in September and November, a high-level team from Wal-Mart was in the Bay Area for some time researching and developing two small retail formats for potential implementation by the retailer. These two formats, a small-footprint grocery market and health and wellness store, would allow Wal-Mart to enter into markets such as the San Francisco Bay Area where they've been unsuccessful in getting permits to build Supercenters do to objections by city officials, community groups and the retail clerks union, which represents workers in nearly every Bay area supermarket.

We've continued to follow this story closely. However, our commercial real estate and industry sources in the region haven't heard much in the last couple months. Here's what we know: First, as reported earlier, Wal-Mart has trademarked two trade names for use on "unspecified retail stores." These names are "City Thyme" and "Field & Vine." Both these names sound like they would fit a retail food store but we can't independently confirm that, nor is Wal-Mart confirming it for us.

Second, we know the Wal-Mart team is no longer in the Bay Area. Our sources told us the group completed their project, at least the on-site aspects of it. We have been told, but can't confirm, that a report on the small format research has been given to Wal-Mart CEO Lee Scott.

We've also been told by multiple sources that, in terms of the small format grocery market, there's a division within the team in terms of going forward with it or just focusing on the retailer's existing smaller format grocery store, Wal-Mart Neighborhood Market. These stores average about 48,000 square feet in size, and are a full-department supermarket. Although much smaller than a Supercenter, they aren't considered "small format" in terms of the supermarket industry. Rather, they're about average size in terms of a stand-alone grocery store.

Regarding the small format health and wellness stores, we've been told Wal-Mart is more excited about their potential, especially the combining of in-store health clinics with the natural, health and wellness-oriented product mix. (Wal-Mart is putting an increasing number of health clinics in its Supercenter stores.) Beyond that, we don't currently have any further specific information we're comfortable reporting in terms of that format's status.

We do know Tesco's rapid rollout of it's Fresh & Easy stores has taken Wal-Mart a bit by surprise, and that the retailer is concerned about Tesco's taking food dollar market share away from the retailer in California. Wal-Mart has only been able to build about half of the number of Supercenters in the state as it planned to build to date, do to the highly-organized campaigns against the big box stores throughout California. As a result, this fact has caused the retailer to lower its projections considerably in terms of the share of retail food sales it planned to have in the Golden State.

Wal-Mart recently announced it would build two Neighborhood Markets in Southern California early next year, its first in the state. This has lead to speculation that the retailer will rollout this format as a way to increase its retail food dollar market share in California as an alternative to its original Supercenter strategy. There's less organized objection to this Wal-Mart format.

If Wal-Mart either rolls out its Neighborhood Market stores in a big way in California--including Northern California and the Bay Area,which is logical as that's where the strongest Supercenter objections are--or goes forward with its "Small Mart" grocery market format, this will add even more heat to the smaller food store competitive landscape in the region. Not only will Safeway be challenging Tesco with it's 20,000 square foot format, but Wal-Mart could pose a serious challenge to both with either its 48,000 square foot Neighborhood Markets or the yet to be officially announced smaller format grocery market (the "Wild Thyme" or "Food & Vine" concepts).

As we've written extensively, Northern California and the Bay Area will be a competitive and operational challenge for Tesco's Fresh & Easy Neighborhood Markets. It also seems the region's going to become a small format food retailing laboratory of sorts as a result of Fresh & Easy's entry into the market next year. Our sources tell us there are a number of other retailers looking at the small format food retailing opportunities for them in the region as well. The small format turf battle and competitive environment in the region is just beginning--and will heat-up even more soon.

Thursday Talking Points Memo

The Invasion of the "Small Marts"-- Will There Be a Small Format Revolution By U.S. Retailers?

Yesterday at the Lehman Brothers Back-to-School Consumer Conference in Boston Steve Burd, Chairman and CEO of Safeway Stores, said the nation's third largest grocery chain is prepared to open smaller format stores if Tesco's 10,000 square-foot upscale Fresh & Easy Neighborhood Market format is successful. "If the smaller store format works we think we could do that and probably do it more effectively simply because we're a well known name in the market," Burd said.

Burd said the key to making a smaller format like Fresh & Easy work is to be able to sell lots of private label products. He said Safeway's private-label brands are much better known than Tesco's which would give the chain a big advantage in its operating areas with smaller format stores vis-a-vis Tesco's Fresh & Easy stores.

At the Lehman conference Burd said based on the anticipated Fresh & Easy locations (which are in Safeway's key operating areas in the Western U.S.) Safeway is doing its research: putting together traffic counts, doing demographic, ethnic and income studies of the areas and preparing to defend Safeway's business.

Burd's comments come on the heels of Wal-Mart Inc. recently beginning to plan and develop two small format stores: an upscale convenience-style market and a small footprint health & wellness format store. Natural-Specialty Foods Memo (NSFM) has named this overall format "Small-Marts" regardless of the retailer involved. It's good shorthand for the format.

Additionally Whole Foods Market, Inc. announced last week it was creating a "Small-Mart" of its own, converting a former Wild Oats store in Boulder, Colorado into a new format called Whole Foods Market Express.

This potential "Small-Mart" invasion was kicked off by UK-based Tesco with its Fresh & Easy Neighborhood Market format. These stores, a number of which are currently under construction, average about 10,000 square-feet and feature high-quality grab-and-go prepared foods, natural, organic, specialty and mainstream groceries and perishables, fresh produce and meats, and other offerings, all in an upscale retail format. The first Fresh & Easy stores are scheduled to open in November.

It looks like the giant retailer (Tesco) from across the pond (UK) has triggered a potential "Small Mart" retail format invasion in the U.S.--especially in the Western U.S. where the first Fresh & Easy stores will open in California, Nevada and Arizona.

The Wal-Mart folks are doing their planning in the San Francisco Bay Area, where Safeway is based and where Tesco is likely to open some Fresh & Easy stores after it opens its first initial batch in Southern California where the retailer has located its headquarters. Going north in California is a logical step along with Southern California, Nevada and Arizona.

The West--especially California--also is one of Whole Foods' top regions. The supernatural grocer just last week opened its largest Western U.S. store in Cupertino in the South Bay Area. The Bay Area is a natural location for some Whole Foods Market Express stores if the grocer has success with the concept. Therefore, California--known for being innovative in many fields--looks to be ground zero for this potential "Small-Mart" invasion.

NSFM's Talking Points Memo believes the jury is out on whether or not the "Small-Mart" format will blossom and become a widespread success. We see a niche for such stores like Fresh & Easy, which combine a basic grocery selection with upscale offerings, especially prepared foods, in a 10,000 square-foot or so footprint.

Many shoppers are tired of huge big box store shopping but also aren't happy with the traditional American convenience store format. These consumers cut-across age, income and other demographics. Seniors, busy working moms, young people, working couples--all are looking for convenience, faster shopping times and quality grab-and-go prepared foods offerings. Trader Joe's has proven this as has the trend of supermarkets to increasingly focus on prepared foods offerings.

The key will be to get such shoppers to make regular trips to and spend a significant amount of money per-purchase at these "Small-Marts." Wawa Markets in the Eastern U.S. has been operating small footprint, traditional C-store/upscale C-store hybrid stores for over a decade. They've had huge success drawing a more upscale customer to their stores as well as the traditional C-store customer, who are primarily men in their mid-twenties to late fifties.

Wawa Markets' success with this type of format is a good model when evaluating the "Small-Mart" potential in terms of Tesco, Wal-Mart, Whole Foods and now perhaps Safeway Stores, Inc. The Wawa stores aren't as upscale as the Fresh & Easy format or the Wal-Mart format from what we've heard from industry observers who've talked with the Wal-Mart "Small-Mart" development team. And the Wawa stores are obviously different from the Whole Foods Market Express format in that Wawa isn't a natural foods-based retailer. However, the similarities between Wawa's stores and these "Small-Mart" formats are enough that Wawa's success in the Eastern U.S. suggests to us that the potential for success is high for the Fresh & Easy and similar formats.

An interesting aspect of Tesco's Fresh & Easy format is that it's not an urban-only based format. In fact the majority of the stores currently being constructed and on the drawing board for Southern California, Arizona and Nevada are in suburban areas. There are some urban stores in Las Vegas, Pheonix and Los Angeles but the vast majority will be near--but outside--the urban core. From what we hear Wal-Mart's plans for its "Small-Mart" format are similar in terms of format and store locations.

NSFM's Talking Points Memo expects to see other large retailers look closely at and even getting into the "Small-Mart" format. We especially believe there's a niche on the East Coast. Thus far all three players--Tesco, Wal-Mart and Whole Foods, and one potential player, Safeway--are focused on the Western U.S. The east coast with it's demographics and mix of large cities and suburbs is wide open. I

It makes since to us that a well-known Eastern U.S. retailer might think about testing a format similar to Fresh & Easy in the East. Tesco likely has plans to locate stores in the East but it will be some time before they can do so. An established Eastern U.S.-based retailer (especially a large supermarket chain) could gain "first mover" advantage by doing this say beginning next year--in addition to being able to leverage its existing brand to the smaller format stores.

NSFM's Talking Points Memo isn't predicting a full-fledged "Small-Mart" invasion just yet. However with Tesco, Wal-Mart, Whole Foods (and possibly Safeway) getting into the game we think it qualifies as at least a mini-invasion. The last time the British invaded the U.S. with a concept (monarchy) they were defeated. Wal-Mart, Whole Foods, Safeway and others don't want to allow this British invader (Tesco) to win the "Small-Mart" format battle. Therefore they are taking it very seriously.

We suggest other retailers will need to do the same. There hasn't been a major retailer who invested billions of dollars like Tesco is in a new format in the U.S. for some time. Tesco has done its homework and the "Small Mart" format just might create some significant changes over time in U.S. consumer shopping behaviors. It also might trigger an internal U.S. retailer format invasion as well as the foreign one it has started.

Retail Memo: The Small Format Revolution Continues to Heat Up

German food retailer ALDI is planning a major expansion of its small format, no-frills, price-impact supermarket chain in the U.S. The small format food retailing revolution in the USA is growing fast at both ends (low and high) of the food retailing spectrum, as well as in the middle. Where is it going? How fast will it get there?

ALDI USA's small format, limited assortment supermarkets (above) have about 15,000 square feet of retail selling space. The small format grocery stores are attractive but basic in design.

As our regular readers are aware, we've been writing about what we believe is nothing short of a small format food retailing revolution taking place in the U.S. It's not that small, neighborhood-style grocery stores haven't existed in the U.S. forever--they have. Rather, the reason we're calling it a small-format food retailing revolution is do to the scale of what's occurring, how fast it's happening, and the involvement of two large international retailers--Tesco and ALDI--who are leading the charge.

The catalyst for this so called small-format food retailing revolution is British grocer Tesco, which launched it's first Fresh & Easy Neighborhood Markets stores in Southern California and Las Vegas, Nevada in mid-November, and in Arizona three weeks ago. Tesco has opened nearly 30 of the small format grocery markets in just a little over a month. The retailer plans to have 200 of the stores open by the end of 2008, and up to 500 stores in the U.S. in five years.

In addition to Southern California, Nevada and Arizona, Tesco will begin opening Fresh & Easy grocery markets in Northern California next year. Further, as we've reported and written about here, the grocer is looking for store sights in New York, Florida and Chicago, along with land to built a distribution center on near Chicago.

Fresh & Easy grocery markets average about 10,000 to 13,000 square feet. They're a hybrid basic neighborhood grocery store and semi-upscale prepared, fresh food retailer. We describe the store format as low-price leader, limited format grocery store meets Trader Joe's.

Price-point is a big focus on the basic grocery side of the operation. The stores' thus far opened have lower retails on national brand (a limited selection though) grocery items than traditional supermarkets like Ralph's, Von's, Stater Bros. and others in their trading regions. In fact, the prices are more in-line with the deep-discount limited assortment and warehouse format stores in Fresh & Easy's current operating areas.

On the fresh, prepared foods side of the business, Fresh & Easy offers a wide variety of ready-to-eat, ready-to-heat and grab-and-go prepared foods. These range from basics like mac n' cheese and meat loaf, to more high-end offerings like Beef Tips in Burgundy Sauce and upscale, ethnic prepared foods featuring Indian, Asian and other cuisines. The stores' even sell fully-prepared complete meals that come with dessert and a bottle of wine. The prices on the prepared foods, which are all branded under the Fresh & Easy private label, are very reasonable.

In addition to the basic grocery items and prepared foods, the stores' offer fresh produce, fresh meats, other perishables and a selection of specialty and natural grocery items. About 65% of the items in the grocery markets' are private label, including fresh milk and eggs, and about 35% are national brands.

Aldi to expand its small format, no frills, limited assortment supermarkets

German food retailer ALDI was operating in the U.S. long before Tesco even thought about and created its Fresh & Easy Neighborhood Markets concept and venture. Unlike the big splash--and rapid store opening strategy--Tesco made in the U.S. with Fresh & Easy, ALDI USA's venture has followed a low-key, low-publicity, gradual-growth model.

The international food retailer first entered the U.S. market in 1976 with a handful of stores in southeastern Iowa. Today, nearly 32 years later, the international grocer with stores in 18 countries, is a major player in U.S. food retailing.

ALDI USA currently operates over 850 stores in 26 states, and is ranked as the country's 24th highest grossing (sales) supermarket chain. The stores' are located from the Midwestern USA (Kansas, Iowa, Illinois) to the Eastern Seaboard. (you can view a map of all 26 states ALDI USA has stores in here. When you get to the linked page, go to "What is ALDI and click where it says "view a map of where we operate and divisional offices."

The German grocer's U.S. supermarkets not only are small format (they average about 15,000 square feet), limited product assortment, and price-impact focused, they're also totally no-frills. The stores' design is attractive but bare bones. If customers want to use a shopping cart they have to pay 25-cents to do so. Aldi USA stores also charge for paper and plastic grocery bags, and encourage shoppers to bring their own reusable grocery carriers. The chain's retail positioning can be summed up as "Less is More."

The small format stores' sell their own branded private label grocery items almost exclusively; with the exception of a handful of national brands, which they primarily offer only on an in-and-out basis. The grocer uses sku rationalization to its fullest, constantly evaluating categories and items and adjusting store category and item assortments. The no-frills markets offer fresh produce, fresh meats, perishables, frozen foods and non-food items, all based on that same limited-assortment merchandising philosophy.

The no-frills markets carry a total of slightly over 1,000 items across all categories. Low-price is the prime category-wide focus of the small format stores. In their trading areas, the stores' generally undercut all food retailing formats on price, including Wal-Mart, warehouse stores, and other deep discounters. ALDI supermarkets have the reputation as being the low-price leader stores in the communities they operate in.

Bring on the revolution: ALDI USA's slow growth model is about to change

With 850 stores in the USA, ALDI is considered a major food retailing player based on any score card one uses. That it is 24th in the U.S. in gross sales is impressive considering its stores are a third or more smaller than today's average American supermarket.

But the small-format, price-impact grocer is about to explode on the American food retailing scene in an even bigger way. ALDI USA just announced it is going to excelerate its new store building program in the U.S. from about 20-30 stores per year, which is it's current rate, to as many as 100 stores a year beginning next year. Additionally, the small-format grocer is going to enter Florida and Rhode Island for the first time next year, and is planning a major new expansion into Texas in 2009.

With stores in Texas and Florida, the grocer will be entering two of the most competitive and lucrative states for food retailing in the U.S., as well as establishing a retail presence in the number two and three largest states in the country respectively.

It might be televised, but the small format revolution is real

ALDI USA's rapid growth plan is predicated on the huge success the grocer has had with its 850-plus store chain. It, along with others like Supervalu Inc.'s Save-A-Lot small format, price-impact chain, have proven not only the viability but success of the format at the lower-end of the food retailing spectrum.

Of course, the international grocer isn't a stranger to high-end, small store format food retailing in the U.S. either. It owns the fabulously successful Trader Joe's specialty grocery chain, which is expanding rapidly into new markets in the U.S. as well.

We don't think it's an accident Tesco positioned it's Fresh & Easy grocery markets as a combination price-impact, specialty and prepared foods hybrid market. They saw the success of no-frills, small format operations like ALDI USA , Save-A-Lot and others--as well as the success of Trader Joe's on the higher, specialty end. In part, this influenced Tesco to craft a format they believe can serve both customer demographics--price-conscious, basic grocery shoppers tired of huge superstores, and time-pressed consumers who are looking for specialty-oriented and convenient prepared foods at not out of this world prices. Like we said earlier, it's low-price, limited assortment grocery market meets Trader Joe's.

Of course the jury is still out on Fresh & Easy. They just opened their first stores last month after all. However, Tesco's plans are to have as many as 500 stores operating in the U.S. in five years. As such, Fresh & Easy isn't an experiment. Rather, it's a full-fledged venture.

Onward small format food retailing revolution

We see what we are calling the small format food retailing revolution going full-steam ahead. As we've reported recently, Safeway Stores, Inc. is currently negotiating with real estate interests in the San Jose, California area of the San Francisco Bay Area for locations to build five stores of a new and yet unnamed small format food retailing venture. The stores will be about 20,000 square feet, and it's believed will offer a wide variety of fresh, prepared foods in addition to groceries and other offerings.

We've also written much about Wal-Mart's research into two small store formats--one a small footprint grocery/food market and the other a small format health and wellness-oriented store, which would include a health clinic in-store. The mega-retailer had a team of executives working on the concepts in the San Francisco Bay Area for a number of months earlier this year. We expect some announcements as to what they might--or might not--do in terms of their small format retailing plans by early next year.

Other retailers like supermarket chain Giant Eagle are testing the small format food retailing waters. The chain, which operates primarily superstores and conventional supermarkets, has opened two Giant Eagle Express stores. The grocery markets are about 15,000 square feet and feature a mix of basic groceries, fresh produce and meats, and upscale offerings, including prepared foods, along with specialty, natural and organic groceries. The express markets also offer some standard convenience store items and have fueling pumps next door.

Further, supernatural grocer Whole Foods Market, Inc. plans to open a small format, convenience-oriented prototype store early next year in a former Wild Oats store in Boulder, Colorado. The grocer is currently remodeling the store into its Whole Foods Express prototype format. The express store will offer lots of prepared foods, especially convenient grab-and-go items. It's also expected to have a limited assortment of natural and organic groceries, fresh produce and meats. An in-store cafe also is likely.

Other food retailers are looking closely at the small format concept and thinking about whether or not it's something they should experiment with. And of course, the original small format food retailer, the neighborhood independent grocer, is smiling and thinking perhaps he was right all along.

We also must mention Pennsylvania-based Wawa Food Markets, which is the prime chain store innovator in the U.S. in terms of mixing convenience store-type retailing and more upscale grocery and specialty store merchandising into a single format.

For decades, Wawa has been successful in building a large chain of such hybrid stores throughout the eastern U.S. The retailer also is one of the early pioneers in offering quality prepared foods offerings in a convenience store setting. Its also one of the first chains to include larger than average grocery and perishables sections in its convenience stores, offering basic groceries at a decent price, compared to the normal convenience store retail prices in the category.

Hold on to your shopping carts folks. We're just seeing the beginnings of a small format food retailing revolution. The format's success on the no-frills, price-impact end is proven--and growing. Success stories like Wawa Food Markets and Trader Joe's--and the initial popularity of Tesco's first Fresh & Easy stores--are beginning to suggest that the small format hybrid food store concept also could become a big success at the middle-to-higher end of the spectrum as well.

Which retailer will be next to test the small format store retail waters; be it low-end, high-end, in the middle, or some combination of all three? We'll let you know. And, if you know of one--do let us know.

[To read numerous stories on the small format food retailing revolution search the blog using key words: Fresh and Easy, Fresh & Easy Neighborhood Markets, Small Marts, The Invasion of the Small Marts, Whole Foods Express, Whole Foods Market, Giant Eagle Express, Wawa Food Markets, Safeway Stores, Inc. and Small Format Food Retailing.]

Tuesday Talking Points Memo

Wal-Mart USA Chief Says Smaller Stores Key to New Strategy

At a meeting with stock analysts today Eduardo Castro-Wright, chief of Wal-Mart USA operations, confirmed that new smaller Format stores are a key part of the retailer's new strategy.

The map above shows the concentration of Wal-Mart stores (all formats) in the U.S. as of 2004. Many more stores have been built over the last three years, especially in the Western and Midwestern U.S., where Wal-Mart has less store concentration.

Eduardo Castro-Wright, head of Wal-Mart's U.S. operations, said today the mega-retailer plans on improving its returns on investment by building fewer stores and stores that are smaller than its current Discount, Supercenter and Neighborhood Market formats. Castro-Wright made this comment today at Wal-Mart's stock analysts meeting, which was broadcast over the internet. The two-day meeting concludes tomorrow.

Yesterday we wrote about a report from the Financial Times newspaper that Wal-Mart has trademarked two names--"City Thyme" and "Field and Vine"-- to be used for "unspecified retail grocery store services," according to the trademark filing. You can read our piece from yesterday here.

Additionally, Natural~Specialty Foods Memo (NSFM) was one of the first publications to report (on August 22, 2007) that Wal-Mart has a team of executives in San Francisco, California researching and developing two small footprint stores--one an upscale, convenience-type grocery market similar to Tesco's Fresh & Easy Neighborhood Market stores and the other a small footprint health and Wellness store, which in addition to selling health and wellness products would have a health clinic in-store, among other features. (Read our August 22 article here. When you get to the page linked, scroll down to "Mid-Week Natural~Specialty Foods Roundup.")

Today's announcement from Castro-Wright indicates to us that what we call the "Small Mart" format development--the upscale convenience-type store and the health & wellness concept--are likely to be part of the retailer's new "smaller store" strategy. Additionally, from a grocery retailing perspective, Wal-Mart is likely to build more of its 42,000 square-foot Neighborhood Markets.

As an example, Wal-Mart is entering the California grocery market with its Neighborhood Market format for the first time. The retailer is building two of the 42,000 square-foot stores in Southern California's desert region, in the cities of La Quinta and Coachella. Both stores are set to open in 2008. (For our take on Wal-Mart's Neighborhood Market format you can read this August 30, 2007 piece, What Wal-Mart Should Do With its Neighborhood Market Format. When you get to the page linked, scroll to the bottom of the page to "Thursday Talking Points Memo.")

The new "Small Marts" in development by the San Francisco-based team are the most interesting to us in terms of the retailer's now confirmed strategy to focus on building smaller stores and building less stores. In a September 6, 2007 piece, The Invasion of the 'Small Marts": Will There be a Small Format Revolution by U.S. Retailers, we discussed Wal-Mart's research and development of the upscale, convenience-type grocery market and small foot print health and wellness-oriented stores in light of UK-based Tesco's launch of its Fresh & Easy Neighborhood Market stores next month.

Tesco's first six Fresh & Easy upscale, convenience-type markets, which put a major emphasis on fresh, prepared foods, open on November 8 in Southern California. Over 100 stores are currently in the pipeline for Southern California, Arizona and Nevada, and stores in those two states--as well as more in Southern California--will begin opening at a rapid pace after the first six open on November 8. Tesco also will build stores in Northern California in 2008, beginning with its first one in San Jose, which we reported here last Friday.

Our sense from talking to industry observers and following the "Small Marts" development very closely is that Wal-Mart is likely to develop and rollout the upscale, convenience-type format stores first. It's not by chance CEO Lee Scott sent his team to California to develop the format(s). After all that's where major global retailing rival Tesco has based its Fresh & Easy Neighborhood Markets headquarters and huge new distribution center--and where it will build and open the majority of its stores. And having the team based in San Francisco we believe is because Wal-Mart is looking initially at an urban strategy for the two "Small Mart" stores.

Both the upscale convenience format and health & Wellness concept would make sense in urban San Francisco, San Jose and Los Angeles initially for example, and then rolling them out to the suburbs after that, either in the same format or with some changes. Wal-Mart is basically unable to build Supercenters in these urban areas, both because of a lack of land and due to stiff opposition from municipal governments, citizen's groups and others, to the Supercenter format. These "Small Marts" would allow the chain to gain market share in highly populated, high-dollar markets where it currently isn't a player. In other words it would be all new dollars for Wal-Mart.

The other comment from Castro-Wright at today's analysts meeting, that the retailer will build fewer Supercenter and Discount format stores, we see as fitting-in well with the new small store initiative. Wal-Mart had planned to open 265-270 Supercenters in the U.S. this fiscal year. However, Castro-Wright said today he expects only 190-200 of those stores to open. And as part of the reduction in Supercenter building strategy the retailer will build only 170 Supercenters next fiscal year and "the figure will likely be less than 170 in future years," he said.

This development obviously opens the door to the "Small Mart" format stores, more Neighborhood Markets, and any other smaller store formats we either don't know about at present or that Wal-Mart doesn't even know about itself yet.

Wal-Mart also plans on focusing more internationally as it feels it's reaching saturation in the U.S. to a certain extent. The retailer said today by 2010 40% of its spending on new stores would be spent abroad, up 10% from current overseas new store development spending of 30%. Currently, international sales account for about 23% of Wal-Mart's revenues.

The chain has been under pressure from investors over declining returns on its 4,000 U.S. stores business. The strategy of building fewer Supercenters and Discount stores, and the development of smaller stores, is in part designed to address Wal-Street's concerns. Wal-Mart is cutting its capital expenditure budget from its original forecast of $17 billion for this fiscal year to about $15 billion , according to CFO Tom Schoewe. The retailer says building smaller stores and fewer Supercenters takes less money, thus the $2 billion or so reduction in capital expenditures.

The Wal-Mart analysts meeting continues tomorrow in Arkansas. Tomorrow's meeting also is being webcast. We will be looking for any further comments regarding the "Small Mart" format developments, and will bring them to our readers here if they happen.

Friday Feature

Giant Eagle Beats Tesco's Fresh & Easy Neighborhood Markets to the Punch With it's Upscale, Express Format

Tesco's Fresh & Easy Neighborhood Markets stores have been all over the media in the past few months, including here at Natural~Specialty Foods Memo (NSFM). Far less attention and coverage (virtually none really) has been given to Pittsburgh, Pennsylvania-based Giant Eagle, Inc.'s new Giant Eagle Express store format and its first (and currently only) store which opened in Pittsburgh, Pennsylvania in May of this year.

The Giant Eagle Express stores are a hybrid, upscale neighborhood grocery and convenience store. Sound familiar? The Pittsburgh store which opened in May is about 13,000 square-feet and features a large, fresh prepared foods selection, basic and specialty groceries, fresh meats, fresh produce and in-store service deli and bakery departments featuring upscale offerings.

The prototype express store also has an in-store cafe with free wireless internet service, a drive-through pharmacy and an automobile fuel service area outside, branded with the GetGo gas banner, and physically separated a bit from the Express market.

Privately-held Giant Eagle had 2006 sales of $6.5 billion. The family-owned retailer is the 22nd largest food retailer in the U.S.. The chain operates 156 corporately-owned supermarkets and 69 franchised stores. Giant Eagle also operates 128 traditional convenience stores under the GetGo banner.

In addition to the Giant Eagle banner, which the majority of the chain's supermarkets fly under, the retailer also has the Market District banner. The stores under this relatively new format are upscale supermarkets focusing on fresh foods and specialty, ethnic and natural foods offerings. There currently are two Market District stores, one in Pittsburgh and another in Bethel Park, with more planned. Giant Eagle supermarkets, convenience stores and now the upscale Giant Eagle Express stores, are located in Pennsylvania, Ohio, West Virginia and Maryland.

The Express store(s) are positioned to be more than upscale, infrequently shopped stores. Rather, by combining a decent assortment of basic groceries and non-foods along with the more upscale prepared foods, fresh produce and meats, and specialty offerings, the retailer wants to be a regular shopping stop for busy consumers.

Bret Merill, Giant Eagle's marketing vice president, describes the Express store(s) as "the contemporary neighborhood grocery store that provides fresh, convenient and affordable groceries and meal solutions to customers with on the go lifestyles." The Pittsburgh Giant Eagle Express, which is open 24 hours a day, 7 days a week, currently offers the same retail prices on groceries and similar goods that Giant Eagle supermarkets do, and the company says they plan on maintaining this policy.

Giant Eagle says they have a great deal of enthusiasm about the Express format and plan on opening more stores soon. Chain executives included the drive-through pharmacy as they want to compete with traditional drug stores as well as fill what they believe is a gap in the food retailing market between large supermarkets (most recently built Giant Eagle supermarkets are between 80,000 and 90,000 square-feet for example) and traditional convenience stores. (The chain's GetGo traditional C-store format stores range from about 2,000 square-feet to 5,000 square-feet.) Noted food industry consultant Willard Bishop recently made a similar point in a report saying his research shows there's a place between the evolving supermarket and evolving convenience store, noting that consumer lifestyles are driving shoppers towards more fresh and prepared foods.

The Giant Eagle Express store(s) share much in common with UK-based Tesco's Fresh & Easy Neighborhood Markets, which the British retail chain is launching in the Western U.S. The first six Fresh & Easy stores will open on November 8. (You can read more here.) In fact, Giant Eagle executives have said Tesco's Fresh & Easy retail initiative in the U.S. was a major motivator to them in designing and building the Express format.

This isn't suprising as Tesco's U.S. initiative is notable for a number of reasons. First is the fact the Fresh & Easy retail operation is a from-the-ground-up startup for the retailer. Before now Tesco had no operations at all in the U.S. The retailer has built a huge distribution center and other infrastructure in Southern California, as well as designing and having numerous stores already under construction at the same time, with many more stores in the development pipeline.

This major store building effort is the second reason the Tesco initiative is notable. Their currently are 100 Fresh & Easy stores either being built or under development. Further, the retailer plans at least 500 stores in the next five to six years. Long term plans call for Fresh & Easy to be a "Starbucks like" concept with a critical mass of stores in regions throughout the U.S. Tesco has said they want to create a $6 billion dollar in annual sales division with Fresh & Easy over the next 10 to 12 years.

Lastly, Tesco is the world's third largest retailer and a very successful one at that. When the global Tesco creates an initiative like Fresh & Easy, not only does it get attention--but the initiative is usually well researched like the Fresh & Easy format was, and thus is ultimately a success.

In addition to Tesco and Giant Eagle Whole Foods Market, Inc. is in the process of converting a former Wild Oats store in Boulder, Colorado into a new prototype upscale convenience-type format called Whole Foods Express. Sounds familiar doesn't it? The Whole Foods Express format also puts an emphasis on fresh, prepared foods, especially quality grab-and-go type items. The store also will feature a limited selection of natural and organic products sold in the chain's supernatural format stores. In-store features such as bakery, cafe and an eat-in area also are planned, according to industry sources and Whole Foods people we have talked to. Expect to see some other features as well based on the concept of convenient shopping without compromising the Whole Foods quality brand.

The world's largest retailer, Wal-Mart, is watching this "small mart" store development trend closely, especially Tesco's Fresh & Easy initiative. We coined the term "small marts" when we reported in August/September that Wal-Mart has a high-level team living and working in San Francisco developing two small format convenience-type stores. One is a small footprint upscale food store like Fresh & Easy and Giant Foods Express, and the other is a similar small size health and wellness format store which in addition to selling these type of items would also have health clinics in-store.

In this September 6, piece, The Invasion of the Small Marts: Will There Be a Small Format Revolution By U.S. Retailers, we discuss Wal-Mart's planning process as well as Whole Foods' initiative, and Tesco's Fresh & Easy Neighborhood Markets. We also discuss the fact that California-based retail chain Safeway Stores is researcher the "small mart" concept, especially Tesco's Fresh & Easy operation, and is planning on developing their own convenience-oriented upscale stores depending on the relative success of Tesco, according to CEO Steve Burd. We also offer an analysis in the piece on the format concept in the U.S. and the relative merits of its success and potential for growth.

Meanwhile, Giant Eagle has its first Express store open and is actively looking to open more throughout its market regions. From what we hear the Pittsburgh prototype store is doing well. We're told by local shoppers and industry observers that the upscale fresh foods like the Panini and other gourmet sandwiches, ready to eat complete meals, salads and other fresh offerings including baked goods, are selling well--and taste good.

These same observers also told us the store's cafe sees lots of activity including business people and others taking advantage of the free wireless internet service and using their laptop computers as they drink their cappucinos or lattes and enjoy the cafe's fresh baked muffins. Most also said the basic and specialty grocery selection was rather good for a store its size and that the retail prices were fairly reasonable. You can read some comments from Pittsburgh-area residents who have shopped at the Giant Eagle Express store here.

One unique opportunity we believe Giant Eagle has going for it--and is taking advantage of--with its Express format is the ability to co-brand with its other operations. For example, the drive-through pharmacy is named "Giant Eagle Pharmacy" like the pharmacies located inside its Giant Eagle supermarkets. The store's outside fuel station is branded as a GetGo fuel station like those included with its traditional convenience stores.

Lastly, the natural and organic foods area in the Express store(s) is branded as "Nature's Basket," the brand Giant Eagle uses to designate natural and organic offerings in its supermarkets. This "co-branding" is done tastefully and in an understated manner so it doesn't overpower the primary brand which is Giant Eagle Express. Giant Eagle is a long-time, popular retailer in its market area with strong retail brand equity which we think will fit well in the way it's being used in the Express format store.

As we're seeing with Tesco, Giant Eagle, Whole Foods and potentially Wal-Mart, Safeway and others, this neighborhood market/convenience-type retailing format is beginning to get some attention in the U.S. Although Tesco has yet to open a Fresh & Easy store, the expectations are high. Tesco isn't new to this format globally however. They operate many "Tesco Express" stores in Western and Eastern Europe.

The question is if the format will go over well in the U.S. This question can be answered in part with a yes based on the fact that Pennsylvania-based Wawa Food Markets has been very successful for decades with its upscale convenience store format. Wawa opened their first store in 1964 and adopted an upscale format for their stores some years later. Today Wawa, the pioneer in upscale convenience-oriented grocery retailing, has 500 stores located in five states.

There are a number of qualitative differences between the Fresh & Easy, Giant Eagle Express, Whole Foods Express and Wawa stores. However, the principal of upscale, convenience-oriented fresh foods and grocery retailing is the same--and Wawa has demonstrated it can be extremely successful and not just in upscale demographic regions and neighborhoods.

Giant Eagle and Whole Foods are just testing the waters. Tesco is going flat out with its Fresh & Easy stores. Wal-Mart is making a major research and development effort into its upscale, convenience format--an initiative we believe will come to fruation soon with an announcement of a prototype store for each of its two "small mart" formats. This relatively new format story is just beginning.

Tuesday Talking Points Memo: Eastward-Bound for Fresh & Easy

Tesco is looking beyond the Western U.S., to Chicago and the East Coast, for Fresh & Easy Neighborhood Markets' expansion

"Natural~Specialty Foods' Talking Points Memo expects to see other large retailers look closely at and even get into the "Small Mart" format. We especially believe there's a niche on the East Coast. Thus far all three players-Tesco (Fresh & Easy stores), Wal-Mart (in development) and Whole Foods (Express prototype store soon to open in Boulder, Colorado) are focused on the Western U.S. The East Coast, with its demographics and mix of large cities and suburbs is wide open (for Fresh & Easy-type stores)."

The quote above is from our September 6, 2007 story, "The invasion of the 'Small Marts'--will there be a small format revolution by U.S. retailers?"

Nearly three months ago we were predicting here that the eastern USA is fertile ground for Tesco, with its Fresh & Easy Neighborhood Markets format, and others to launch what we call a "Small Mart" format revolution. "Small Mart's," a term we coined because of Wal-Mart's ongoing research into developing two small format stores, are small footprint grocery markets like Tesco's Fresh & Easy, which the British retailer has started opening in the Western U.S. Thus far, thirteen Fresh & Easy stores are open in the U.S.--eight in Southern California and five in the Las Vegas, Nevada metropolitan area. Two more Fresh & Easy convenience-style grocery markets open tomorrow in Southern California. The first stores open in Arizona in early December.

Two news stories, one on November 25 in the London Times Online and another last week in the publication Retail Week, are reporting that Tesco is scouting the Eastern U.S., particularly New York and New Jersey and down to Florida, and the Chicago metropolitan area, for locations for Fresh & Easy Neighborhood Markets. Additionally, Retail Week reports Tesco is looking for a sight in the Chicago region for a distribution center.

We've heard these rumors of a Midwest and Eastern U.S. expansion from our sources--who've been very reliable to date--for the past month. However, we haven't reported on it as the time- line we've been hearing is 2009. However, it's highly-probable Tesco has moved it's post-Western U.S. expansion time-line up, as the retailer is on the fast-track in terms of it's Fresh & Easy growth strategy.

For example, as we were one of the first to report, Tesco executives are currently combing Northern and Central California for Fresh & Easy store locations and a distribution center to serve the region. It's possible the grocer could build as many as 50-75 stores in Northern and Central California in the next 24 months.

Southern California was initially the primary target region for stores in the state for 2007 and 2008. Tesco plans to have 50 Fresh & Easy stores open in Southern California, Nevada and Arizona by February, 2008, according to Tim Mason, CEO of Tesco USA.

According to Retail Week, a U.S. source told the publication Tesco was "definitely" considering launching a distribution center and Fresh & Easy stores in and around Chicago. However, the source said it's unlikely Tesco would do so before the end of 2008. This source's information to Retail Week fits our sources' information fairly well in terms of the time-line for Midwest and Eastern U.S. expansion plans.

In Saturday's London Times Online story, which includes an interview with Tesco CEO Sir Terry Leahy, the publication reports industry sources in the UK have told it that Tesco officials are "swarming the East Coast of America to check for potential (Fresh & Easy) locations in New York and Florida." Sir Terry wouldn't confirm this to the Times however.

Tesco's rapid geographical expansion in the U.S. makes sense based on the model the British-based international retailer is using for its Fresh & Easy stores. Both Sir Terry and Tim Mason have said Tesco USA's strategy is one similar to Starbucks, in that they want Fresh & Easy markets literally in every neighborhood in their trading regions. By making the green and white bannered convenience-style grocery markets ubiquitous in the regions it chooses to do business in, Tesco can create a "mass retail" effect similar to what Starbucks has done with its upscale coffee shops. It's also what conventional convenience store operators like 7-Eleven and Circle-K have done in the U.S. for decades.

Rapid U.S. geographical expansion also fits into Tesco's overall corporate strategy in terms of its growth and sales goals. Sir Terry told the Times Tesco's target is to have more than half its sales from outside Britain in the next five to ten years. Currently, less than a third of Tesco's sales come from outside Britain, where it's the second largest food retailer after number one J. Sainsbury.

International expansion has been the hallmark of Sir Terry's decade as the head of Tesco. In addition to the Fresh & Easy venture in the U.S., Tesco has gone into Eastern Europe in a big way. The retailer also is currently working on plans to expand into Russia. Today, Tesco has stores in 12 countries outside the UK. In the ten years since Sir Terry has been in charge, Tesco's sales have doubled, the majority of those sales coming from international operations.

In many ways the U.S. will be the retailer's biggest challenge though. Other British retailers like Marks & Spencer and J. Sainsbury tried stores in the U.S. in the past--but failed. Further, the Fresh & Easy format--stores that average about 10,000 square feet and offer a combination of up-market fresh prepared foods along with basic national brand and private label groceries--is a gamble in a country where Wal-Mart Supercenters, Costco Wholesale Stores, Whole Foods, Trader Joe's, Safeway Stores, Kroger, Supervalu and so many others divide up the competitive food retailing pie using a variety of strategies--ranging from super upscale and organic foods marketing to deep discount pricing strategies.

Tesco has been extremely successful with its "Express" grocery market format however in the UK and throughout Europe. Fresh & Easy is a variation of that proven format. As such, many believe there's a space in the U.S. food retailing scene for just such an operation--a combination basic grocery market and upscale prepared foods retailer housed in a smaller, more convenient format.

With its sights set beyond the West Coast, to America's heartland and East Coast, Tesco is betting with its corporate wallet that such a food retailing space exists in the U.S. They just might be right?